Superior Industries International manufactures cast aluminum road wheels to original equipment manufacturers (OEM) for automobiles and light truck manufacturers in North America.
In 1995 Superior entered into a joint venture with Otto Fuchs Kg (Otto Fuchs), to form Suoftec Light Metal Products Production & Distribution Ltd (Suoftec). The joint venture was intended to manufacture cast and forged aluminum wheels in Hungary, principally for the European automobile industry. During Q2 2010, Superior liquidated their investment in Suoftec, and on June 18 sold 50% ownership to joint venture partner Otto Fuchs. At the time of sale, loss on the sale was $4.1 on a total investment of $12.8 million. Suoftec posted a $24.8M loss during their 2009 fiscal year. 
On June 28, 2010 Superior entered into an agreement with Synergies Casting Limited (Synergies), a private aluminum wheel manufacturer based in Visakhapatnam, India, acquiring a minority interest in Synergies. As of December 31, 2010, the total cash investment in Synergies amounted to $4.5 million, representing a 14.6% ownership stake in Synergies. There is an option to purchase an additional $5.0 million, which would increase ownership to 26%, if certain conditions are met by the February 15, 2011 deadline. Superior has the option to liquidate their position on or before March 30, 2011. 
As mentioned in the conference call, Synergies had a slow Q4 due to the late release of Chrysler's 300 and Charger product offerings. Although these late releases were in no part the fault of Synergies, they display a critical weakness of Superior. As an automotive supplier, if the customer is having difficulties manufacturing or selling vehicles Superior's sales are still hurt. However, the Chrysler 300 and Charger have since been released in India and sales are expected to rebound for Q1 2011.
For the past two years there have been more insiders purchasing, both number of people and transactions, than selling. However the sale value has always exceed the buy value. The larger volumes of purchasing, instead of selling, could reveal management's beliefs that the stock is undervalued. However management's true motives are still unknown. 
Superior maintains and operates five facilities that produce aluminum wheels for the automotive industry, located in Arkansas and Chihuahua Mexico. These five facilities encompass 2,466,000 sq. ft of manufacturing space and 30,000 sq. ft. of office space. Superior owns all of its facilities with the exception of the warehouse in Rogers, AR, and its worldwide headquarters located in Van Nuys, CA which are leased.
Below are the five manufacturing facilities:
December 2008, during the recession, Superior closed their Kansas plant and closed their California plant in June 2009, production from these plants was shifted to the Mexican manufacturing facilities. This closure of US facilities is responsible for the shift of revenues from the United States (2008) to Mexico (2010), and the decrease in revenues during 2009 and rebound in 2010 was a result of the recession in 2009 and economic recovery during 2010. 
Superior Industries International is financed exclusively through equity with 0.00% Debt, and has reported no Long-term debt on its balance sheet since December 31, 2003. 
Superior currently has a current ratio of 5.41 with total current assets of $381.61M and total current liabilities of $70.54M. Superior has maintained a high current ratio, averaging around 4.392 for the last 5 years and their current ratio has been above 2.00 since December 31, 1995.  
Superior owns several subsidiaries, all but Cyprus are 100% owned.
Although Superior doesn't directly compete with any other aluminum wheel suppliers in North America there are several auto parts companies that are financially comparable to Superior.
American Axle & Manufacturing Holdings (AXL) designs, engineers, and manufactures drive line systems for light trucks and sport-utility vehicles. The company produces axles, propeller shafts, chassis components, and forged products. American Axle also manufactures various drive line components for light trucks and sport utility vehicles manufactured in North America.
Meritor Inc. (MTOR) provides drive train mobility and braking solutions for original equipment (OE) manufactures of trucks, trailers and specialty vehicles. The Company also offers related aftermarket parts in the transportation and industrial sectors. Meritor serves customers that include motor carriers of all sizes, OE dealers, independent distributors and others.
Tenneco Automotive (TEN) designs, manufactures, and markets emission control and ride control products and systems for the automotive original equipment market and the aftermarket. The company's products include shocks and struts, shock absorbers, mufflers, and performance exhaust products, as well as noise, vibration, and harshness control components.
TRW Automotive Holdings (TRW) supplies automotive systems, modules, and components to global automotive vehicle manufacturers and related aftermarkets. the company's products include active and passive safety related products. TRW's products are primarily used in the manufacture of light vehicles
When using Price to Earnings Superior looks overvalued compared to American Axle and TRW, but significantly undervalued compared to Meritor, Tenneco, and the average of Superior's Bloomberg Peers. This trend reverses with Superior's Price to Sales, it would seem to be overvalued compared to every peer and well above the Bloomberg average.
Superiors Enterprise Value divided by Revenue is much lower than their Bloomberg peers but is higher than Meritor, Tenneco, and TRW while slightly below American Axle. Superior's Enterprise Value/EBITDA of 5.64 (according to Yahoo!) is higher than American Axle and TRW, while far below Meritor, Tenneco, and their Bloomberg peers.
The automotive supplier industry is highly asset intensive so the return on asset ratio is very important in determining whether management is able to efficiently utilize the firms assets. Superior has a very favorable return on assets, higher than all peers and the average of their Bloomberg peers. Superior's return on equity is lower than TRW's and the average of its Bloomberg peers. This is due to Superior's lack of debt financing, and therefore increased equity compared to other automotive suppliers. For example TRW has 77.76% of their financing through equity, while Superior has 100% equity financing. It is important to note that superior's cost of equity (11.12%) is lower than TRW's cost of equity (16.03%).
Margins are huge to automotive suppliers, their ability to control input costs, manufacturing expenses, and turn sales $$ into profits are vital to success. Superior's Gross Margin is about average, slightly below it's Bloomberg peer's average while above Meritor and TRW, but also below American Axle and Tenneco. But most importantly Superior has a very favorable profit margin, their profit margin of 11.65% is above every one of their Bloomberg peers and almost three times the Bloomberg peer average. This incredible profit margin speaks to Superiors manufacturing efficiencies, and will provide a competitive advantage moving forward through the ability to outspend competitors in R&D, or increasing their manufacturing capacity.
Superior has a Asset turnover slightly less than its comparables. However, this low asset turnover is more than offset by their high profit margin. The low asset turnover ratio, but high profit margin reveals management's intentions of having fewer profitable sales instead of increasing sales volume while reducing net income. This approach could be favored because through establishing positive margins management reduces their dependency on ridiculously high sales volumes to return a satisfactory return. Moving forwards this strategy would prove favorable during times of economic downturn because sales volumes would reduce for both strategies, but with a high profit margin Superior needs less volume to maintain the same level of income.
Inventory turnover is reflects how many times a company's inventory is sold and replaced over a period. It is generally calculated as Sales/Inventory or Cost of Goods Sold/Average Inventory. A low inventory turnover implies poor sales and, thus excess inventory while a high inventory turnover reflects high sales. Superior's low inventory turnover ratio (resulting in an average collection period of 52) could cause liquidity concerns going forward, but is not currently an issue because of their strong current ratio. Secondly, management mentioned in their earnings call that they are increasing inventory in anticipation of an increase in sales. Therefore the high inventory that causes the low inventory turnover ratio is intentional, although the high inventory levels also cause liquidity concerns.
Superior's, slightly lower than comparables, inventory turnover could indicate problems selling inventory, or overstocking. However, this is not a concern because management is significantly increasing production to over 90% of capacity (details below) in anticipation of future demand. Obviously this could be a concern if future demand doesn't materialize.
The Accounts Payable Turnover Ratio shows how many times per period the company pays its average payable amount. Accounts Payable Turnover is calculated by taking the Total Supplier Purchases divided by the Average Accounts Payable. Superior's significantly high payable turnover reveals quick payments to suppliers and this quick payment could possibly strain future cash flows and is possibly a concern for future liquidity, but their favorable quick and current ratio settles any current liquidity concerns.
Measured up against its comparables, Superior is hoarding cash and current assets. Superior's quick and current ratio's are almost double their next closest Bloomberg peer. Looking at Superiors historical averages their 20 year average current ratio of 3.48 is also above any of their Bloomberg peer's current ratio. This would imply that management is more conservative than comparables and prefers to hold large amounts of cash which could imply that management doesn't know what to do with excess cash or have no good ideas for where to put extra cash.
The inventory to cash measure simply conveys how long it takes a company to transform their inventory into cash, including both how long it takes to sell the inventory and how long it takes to collect on the sale. Superior's inventory to cash (days) is higher than its Bloomberg peers. Their cash conversion cycle is dangerously high, more than double the Bloomberg peers average. However this high conversion cycle is not an immediate threat due to their strong quick and current ratios, but should be a focus of management moving forward. The high CCC could be the underlying reasoning behind management's decision to horde cash and current assets. However, most investors would prefer that management reduces their CCC, or accurately forecasts future cash flows to avoid sever liquidity concerns, and reinvests the cash in the company or distributes the extra cash to shareholders.
Superior's lack of long term debt can be seen both as a positive and a negative. On the positive side, there are no interest or debt payments that will threaten future cash flows or influence Superior's ability to reinvest in itself. However, the lack of debt means no leverage and Superior would lag in a bull market. The rest of Superior's Bloomberg peers are much more aggressive with the use of debt financing, with an average of 2.37 Debt to EBITDA and an average of 175.53% of long term debt to capital.
Within the aluminum manufacturing market competition is based primarily on price, technology, quality, delivery, and overall customer service. Superior currently supplies 30 to 35% of aluminum wheels installed on passenger cars and light trucks in North America. There are no other American companies that produce aluminum wheels for OEM's. When contacted, investor relations mentioned, "There really are no direct competitors. I mean, there are the Chinese manufacturers."
These Chinese manufactures, with facilities in North America, are the largest competitor to Superior. However, none of the competitors represent greater than 10 percent of the total North American production capacity.
Beyond these Chinese manufactures the aluminum wheel manufactures, there are also companies that produce aluminum wheels for racing and after market.
Race Wheel Manufacturing
After Market Wheel Manufacturing
However, none of these competitors supply OEM's and therefore do not compete with Superior they simply also manufacture aluminum wheels.
Shown to the right is a table of key statistics for the SUP management team (data acquired from Bloomberg):
It's important to note that superior has operated with less than a third the number of management employees, CEO compensation less than half, but almost three times the CEO tenure when compared to the industry average. Superior's ability to retain top talent despite these difficult obstacles speaks volumes as to management loyalty towards Superior.
Superior's CEO has a tenure of 4 years. Superior also has five members of the management team with five or more years of experience. Lastly, there are only two VP's with less than two years of experience.
There are many different macroeconomic factors that affect Superior, just a few are Aluminum prices, consumer credit availability, interest rates, and the overall recovery of the American economy.
As you can see the forward prices have aluminum increasing 1.15% from Q2 to Q3 2011 and then price increases slowing to 0.77%, 0.66%, 0.62% and then 0.50% for Q2 2012. So aluminum is expected to appreciate going forward but not significant and the gradual price increases in the current forward market can and will be passed along to customers as actual prices increase.
Consumer Credit Availability
Small Business Credit Availability looks favorable moving forward and this increase of credit availability will allow for capital expenditures, such as company automobiles, easier and possibly increase the demand for automobiles.
If access to credit for consumers was to tighten this would make large purchases, such as automobiles, almost impossible for most Americans. This would force consumers to keep their current vehicle, or purchase a pre-used vehicle, neither help Superior and reduce demand for automobiles which in turn reduces the demand for Superiors aluminum wheels. Therefore, a tightening of credit could have drastic affects for demand for Superiors customers.
The Fed has amassed a portfolio of more than $2 trillion which has helped to keep interest rates low and represents a bet by the Fed that interest rates will stay low. Otherwise their massive portfolio of low yielding debt will dramatically decline in value. Additionally, Federal Reserve Chairman Ben Bernake said rates will remain at historic lows for "an extended period," and that rates won't rise until the Fed has met at least twice more. Which guarantees rates will remain low for the next twelve weeks, but beyond that it is uncertain to predict whether rates will remain low, or whether they will rise and how high they will rise. 
Recovery of the American Economy
Although the United States Government has been able to cling to its AAA rating, Standard & Poor's cut its rating outlook on the U.S. to negative from stable on Monday (April 18, 2010). If the United States government continues its spending spree and lack of financial responsibility there will be disastrous consequences for the American Economy which will negatively impact Superior's sales revenues and income.
Superior supplies OEM's in North America and thus relies on the American markets for demand, if the recovery was to stumble or slip back into another recession, or possibly depression, there would be significantly negative effects for Superior.
Gasoline plays a huge role in the expense of owning and operating an automobile. Superior is in a somewhat favorable position for high gasoline prices by supplying products for automobiles and light trucks instead of more gas intensive alternatives such as SUV's or heavy duty trucks. But overall higher gasoline prices will encourage mass transit as opposed to individual vehicle ownership.
Below are 20 years (and the averages) of ratio data. Some of this data conflicts with the comparables section, both sets of data came from Bloomberg just via different ways. The comparables section was recovered using the 'Relative Valuation' page and inserting columns with the respective information. Whereas, the historic ratios came from financial statements exported to MS excel.
Superior is currently trading at 11.49 price to earnings, well below its twenty year average of 17.07. Although it is important to note that this average does not include the 3 periods with negative earnings. Superior's price to sales of 0.88 would suggest it is slightly undervalued when compared to its twenty year average of 1.07. However, since 2003 Superior has averaged a price to sales of .72 so compared to their recent performance superior is overvalued from a price to sales perspective.
Superior's price to book ratio of 1.54 is slightly lower than its twenty year average of 1.77 and has made a significant rebound since its low of .59 in 2007. Superior's Price to Cash Flow of 20.67 is significantly higher than its twenty year historical average of 11.59 and has remained above 18 since 2008. Lastly, the dividend yield of 2.63% for Superior is above its twenty year average of 2.27% but below its seven year average of 3.86%.
Superior's EBITDA, Gross, and Operating Margins are slightly below their twenty year moving averages but have rebounded since their lows in 2009 and are at their highest level since 2003. However, Superior's profit margin of 7.18% is well above the twenty year average of 5.22%. Once again, superior's profit margin remains at its highest level since 2003.
Asset Management Ratios
Superior's inventory turnover of 10.28 is high compared to their twenty year average of 9.2. A high inventory turnover ratio might imply management's ability to keep inventory levels favorably low and their ability to sell current inventories. Superior's inventory to cash saw a dangerous high in 2009 when it reached in 127.82 due in part to deflated demand and significantly low inventory levels.
Superior has been able to reduce their receivable turnover from a dangerous level of 77.74 in 2009 to 52.04 in 2010, below its twenty year average of 56.92. Superior has a payable turnover of 23.99 which is incredibly high when compared to its twenty year average of 14.39 and 2009 level of 15.98. Superior's asset turnover ratio has recovered from a low of 0.72 in 2009 to 1.29, returning to about its twenty year average of 1.26.
Balance Sheet Ratios
Superior's current ratio of 5.41 is well above its twenty year average of 3.48, and has been above its twenty year average since 2006. Their Cash Conversion Cycle of 72.24 remains above their twenty year average of 68.89, but has made a significant recovery since their high of 104.97 in 2009.
Superior has recently been hoarding current assets, as evident by their 66.66% of current assets as opposed to their twenty year average of 51.92%. Their current assets as a percentage of total assets has increased consistently since 2006. Superior's accounts receivable, as a percentage of total assets, of 20.39% is in line with its twenty year average of 19.41%. Their accounts receivable decreased to it's twenty year low in 2008, when it reached 14.23%. Lastly, Superior's 13.08% of inventory compared to total assets coincides with their twenty year average of 12.08%.
Threat of entry of new competitors
The entry of new competitors is unlikely. Initially, aluminum wheel production is highly asset intensive and requires thorough and precise manufacturing processes. Secondly, and most importantly, there are few purchasers with established supplier relationships.Ford/GM/Chrysler and other automotive manufacturers would be hesitant to purchase products from a new, unproven and potentially unsafe or unreliable supplier. Superior's established relationships with customers may not provide a significant competitive advantage, but it is a huge economic moat for new and unproven competitors.
Intensity of competitive rivalries
Competition between rivals is based primarily on price, technology, quality, delivery, and overall customer service. Superior currently supplies approximately 30-35% of aluminum wheels installed on passenger cars and light trucks in North America. Superiors primary competitors are Asian manufactures who export to North America, none of whom have facilities in North America that are greater than 10 percent of the total North American production capacity.
With only a few, but major, players in the aluminum wheel manufacturing industry it could be described as an oligopoly. This classification helps to minimize the effects of price-based competition, reducing the risk of a disastrous price war.
An alternative to aluminum wheels are steel wheels. The aluminum wheel installation rate on passenger cars and light trucks in the U.S. was 65 percent for the 2010 model year compared to 64 percent for the 2009 model year and 65 percent for the 2008 model year. Aluminum wheel installation rates have increased to this level since the mid-1980s, when this rate was only 10 percent. Aluminum wheels became popular because of their differentiator factor, and were seen as a way to spruce up new vehicles, their reduced weight and thus increased performance also helped. Management expects this 65 percent to remain steady going forward.
Aluminum wheels compared to steel wheels.
Another threat to Superior is the increase in mass public transportation in North America. Increased Gasoline prices, availability to public transportation, and other factors may push consumers to prefer bicycles, or alternative methods of transportation. If more and more people take the train, subway, or fly as they travel, this would lessen the demand for cars and thus Superior's volumes would decline.
Bargaining power of customers
Superior is reliant upon a small number of customers for a significant portion of revenues (breakdown below). This few number of customers would imply strong buying power, however there are very few aluminum wheel suppliers that supply OEM's and the vast majority of costs (and thus selling price) is due to Aluminum and manufacturing costs the affect all potential suppliers. Suppliers differentiate themselves based upon price, quality, delivery, and service requirements. Its important to note that Superior has entered into multiple vehicle supply contracts with key customers over the past year.
Superior's 2010 revenue breakdown is: $237.4M from Ford, $237.4M from GM, and $100.7M from Chrysler. 
Bargaining power of suppliers
Suppliers have minimal bargaining power because the primary product supplied is Aluminum, which is a commodity and readily available on international markets. Natural Gas and other energy expenses also contribute towards the overall manufacturing costs. Regardless, Superior has entered into purchase commitments to guarantee the delivery of aluminum. These purchase commitments are with several major domestic and foreign producers with whom trade relations have been established through previous purchase commitments and long standing relationships.
Bargaining power of workforce
Although not part of the traditional Porter's 5 forces, within the automotive industry the unions and union workers have as much if not more influence on the future profitability of the automotive industry as key suppliers. For Superior's customers they are subject to the whim of the Automotive Workers Union. Fortunately for Superior none of their 3,500 full time employees are part of a collective bargaining agreement.
Selling the right products for the right vehicles: Although car and light vehicle production increased 39% in 2010, Superior shipments increased by 54%. The reason Superior's growth exceeded the markets growth was due to strong positions at GM and Chrysler, and strength in light-duty trucks. Superior gains market share and increased sales when its customers increase market share, GM and Chrysler saw year-over-year market share gains of 2 points. Light duty trucks also saw impressive growth, light duty trucks grew by 48 points, 18 points above passenger cars, which gret 8 points above the general market. Lastly, Superior saw benefits from specific program positions including GMT 900, Ford F-Series, GM Malibu, Ford Fiesta, Cadillac SRX, Nissan Sentra, Toyota Avalon 
Lastly, unit shipments to international brands increased significantly, reducing domestic concentration by almost 4 points. Through shifting sales to international brands as opposed to domestic brands Superior recieves important customer diversification benefits.
During 2010 Superior was faced with the difficult position of low inventory levels, rapidly increasing customer orders, and operating with fewer manufacutring facilities. To solve these potentially diasterous problems, management was able to successfully raise capacity utilization to 98% for Q4 2010, and 91% from the full year of 2010. During the Q4 2010 confrence call, managment would like to reduce the capacity utilization down to 90% looking forward. It's important to note that the capacity utilization numbers could be increased going forward, they currently include downtime for scheduled maintance and do not include possible overtime
Margin Rebound: Superior's profitability margins are rebounding nicely after the economic downturn, going from negative to overwhelmingly positive from 2009 to 2010. Superior's EBITDA/Gross/Operating/Profit Margin are all at their highest levels since 2003/2004.
The average tenure of board members is significantly higher than peer companies (19.4 compared to 8.2 years).
Earnings Surprises: The unfortunate trend of earnings disappointments during 2008/2009 has reversed itself and Superior has seen four quarters with an average earnings surprise of 101%.
Although the economic downturn crushed revenues and net income, Superior was able to maintain a steady dividend of $.64 per share for 2010, 2009, and 2008. The steady dividend payment reveals managements ability to properly control cash flows in the midst of an economic crisis and other negative factors.
Changes in the price of Aluminum are not a direct threat because these costs are passed along to customers. However, there may be a lag between increased raw material costs compared to increased selling prices.
The failure of the Joint Venture in Hungary could cast doubts about managements ability to select future investments and acquisitions. This could reveal one weakness of management, based on compensation they are far inferior to their peer companies (average reported compensation of $.86MM compared to $3.62MM).
During 2010 cash increased by $11M, Superior has very high current and quick ratios both in general and compared to their peers. Although management has historically kept a significant amount of cash on hand, it would be beneficial to shareholders to either distribute this extra cash back to shareholders, further reinvest in the company, or seek strategic acquisitions. However, the failure of the joint venture in Hungary casts doubts about managements ability to select good investment opportunities.
Superior's investment in an Indian private aluminum wheel manufacture (Synergies Casting Limited, details in the Business Analysis section) opens the opportunity to supply OEM's in the Indian and Asian automotive manufacturing markets. The contract allows for Superior to increase their investment by $5 Million or to 26% investment in Synergies.
Although the SG&A expense increased by $5.6M for the full year 2010, it decrease 1.5 points when measured against net sales. One third of the increase was from an ERP system implementation. The ERP was responsible for the late 2010 financial statement release, this problem has been resolved and will not happen again. Phase 1 for the ERP system is complete and will likely result in improved inner company communications. Phase 2 for the ERP implementation will begin Q1 2011, this will result in recording and analyzing data from manufacturing processes. Once phase 2 completes, the ERP system will increase quality control, reduce spoilage and costs, and help Superior refine their manufacturing processes while constantly monitoring results and finding areas for improvement.
If Superior's customers continue to increase market share, their product lines continue strong performance, or consumers continue the shift towards automobiles and light trucks: Superior will continue to see strong sales growth without undergoing any fundamental changes.
During future economic downturns Superior will not be able to count on the U.S. government for bailouts such as the Cash for Clunkers program. During 2009, to jump start purchases of new, more fuel efficient vehicles, the U.S. government initiated the Car Allowance Rebate System (CARS), otherwise known as "Cash for Clunkers." Starting July 24, 2009 and running through August 25 the CARS program pumped $2.877 billion into new vehicle purchases. Although CARS prompted 690,114 dealer transactions, similar government stimulus is unlikely due to the unpopularity of the rising U.S. government debt levels.  
Although Superior has no facilities in Japan, do not supply any facilities in Japan, and was not affected by the natural disaster there, some of their customers receive parts from Japan. This could hurt Superior if, for example, Toyota shuts down vehicle production on a certain type of car because they are waiting on a different component from japan to finish production. This would reduce shipments from superior to this specific manufacturing facility for an indefinite period of time. Management specified in their Q1 2011 conference call that this canceling of shipment, "probably over the phone, maybe a day in advance." This abrupt cancellation of shipments might increase inventory, negatively impact sales and earnings, and could pose other future threats to superior although management largely disregarded this as a serious threat.
If one or more of Superiors customers would begin purchasing, or purchase more of their aluminum wheels from a Chinese competitor the increased overhead allocation on lower volumes would completely wipe out any profits and quickly result in operating losses.
Superior has been running at nearly full capacity, 98% for Q4 2010, and if sales continue to increase at dramatic levels Superior will be unable to meet customer orders. This stock out would have disastrous affects for customer relations and would likely increase the likelihood of customers switching to Chinese manufacturers for a larger portion of their purchases. 
The UAW has recently begun a push to increase its membership base. If Superior's employees were to join the UAW or create a union of their own this could have disastrous results on production capability in the case of a workers strike. This would also increase expenses across the board, reducing the wonderful profit margins that distinguish Superior from its competitors.